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Push to lift ban on crude oil exports gains momentum in Congress

Proponents of lifting the US ban on crude oil exports have made significant progress in recent weeks. The House Energy and Commerce Committee approved a bill today to lift the decades-long statutory prohibition. This follows a vote in late July by the Senate Energy and Natural Resources Committee in favor of similar legislation. Advocates for lifting the ban have been encouraged by studies supporting their argument that allowing exports will not result in higher US gasoline prices and would even reduce the price at the pump. But the issue still divides members of Congress largely along party lines, complicating the prospects for enacting a bill without some significant compromise that gains bipartisan support, particularly in the Senate, for ending or modifying the ban.

Background

The U.S. crude oil export prohibition dates back to the 1970s. The 1973 Arab oil embargo caused a steep increase in crude oil prices and highlighted the United States' reliance on crude oil imports. US producers had also reacted to domestic price controls for crude oil in place at the time to export and sell their oil in the unregulated world market. In response to these developments, in 1975 Congress passed the Energy Policy and Conservation Act with a restriction on U.S. crude oil exports, subject to the President's discretionary authority to make exceptions deemed to be in the national interest.

President Reagan determined in 1985 that the export of crude oil to Canada for internal consumption was in the national interest, and other exceptions have been established over time, including exports from Alaska's Cook Inlet and exports of a limited annual volume of heavy California crude oil. But U.S. crude oil exports have remained quite limited. According to the Energy Information Administration (EIA), an independent analytical arm of the U.S. Department of Energy, crude oil exports in 2014 averaged just over 126,000 barrels a day (b/d), almost all of which was sent to Canada.

For much of the these roughly four decades the U.S. crude oil export ban had been relatively non-controversial, with U.S. crude oil production in steady decline as domestic demand increased. After peaking at 11.3 million b/d in 1970, U.S. production fell to 6.8 million b/d in 2006. U.S. demand for oil grew by 6 million b/d over that same period, making the nation increasingly dependent on imported oil to meet its energy needs.

Since 2008, this trend has been dramatically reversed. U.S. oil production grew to 9.5 million b/d by March of 2015, with substantial gains in just the last three years. During this same time, production of natural gas liquids (e.g., propane, ethane, etc.) from shale and other natural gas wells has doubled from 1.7 million b/d to 3.2 million b/d, for a total of 12.7 million b/d. Meanwhile, U.S. demand for oil has decreased nearly 1.8 million b/d.

Different Perspectives of Producers and Refiners

The trend of increasing production and dwindling demand might have been motivation enough to reassess the crude oil export ban. But it is the type of oil being produced in the U.S. that has given particular momentum to the debate. Most of the recent and anticipated growth in U.S. oil production is of "tight oil," which in the U.S. is generally of the light/sweet (low sulfur) variety, referred to as LTO or “light tight oil.” This crude output is of a lighter weight and lower sulfur content than the “heavier” and “sour” Canadian, Mexican, Venezuelan and Middle Eastern crudes that most U.S. refineries are configured to process, creating a mismatch between the growing U.S. crude supply and current U.S. refining capacity. This mismatch has impacted the debate about the ban on exports. Domestic oil producers express concern that without the ability to export to foreign markets, they will have to discount their oil to incentivize refiners either to process it at existing facilities or build new refineries. Refiners, meanwhile, argue that allowing crude oil exports will raise domestic crude prices and harm their competitiveness.

While these different upstream and downstream impacts have been part of the crude oil export debate on Capitol Hill, the more difficult political hurdle for proponents has been the potential impact of lifting the ban, or at least the perceived impact, on US gasoline prices.

Will Lifting the Ban Lead to Higher Gas Prices?

Prominent Republican members of the House and Senate, and a few Democrats, have argued the ban ignores the realities of today's energy landscape and that lifting it would further increase domestic oil production, create jobs and help grow the economy. Yet support for lifting the ban has built slowly even among Republicans because of looming questions about whether allowing US crude oil exports will raise prices at the pump for American consumers.

Those members have been emboldened in the past several months by assessments of the Energy Information Administration (EIA), an independent analytical arm of the U.S. Department of Energy. The EIA concluded in a study released in October 2014 that "[t]he effect of the relaxation of current limitations on U.S. crude oil exports would have on U.S. gasoline prices would likely depend on its effect on international crude oil prices, such as Brent, rather than its effect on domestic crude prices." Senator Lisa Murkowski (R-Alaska), chair of the Senate Energy and Natural Resources Committee and a strong advocate of lifting the ban, and others seized on the EIA study to argue that exporting crude oil will not raise domestic gas prices and by increasing global supplies of crude those U.S. exports should, in fact, help drive gas prices down.

Earlier this month the EIA issued the latest in its series of analyses of the impact of lifting the ban on US gasoline prices. It gave further ammunition to export advocates with its basic conclusion that ending the ban would likely leave US gasoline prices either unchanged or slightly lower. Echoing the argument made by Senator Murkowski, the study states: "As domestic producers respond to the higher WTI price with higher production, the global supply/demand balance becomes looser unless increased domestic production is fully offset by production cuts elsewhere. The looser balance implies lower Brent prices,which in turn results in lower petroleum product prices for U.S. consumers." (emphasis added)

However, the study also describes the potential divergent impact of lifting the export ban on US producers and refiners. In the most extreme study case, the EIA estimates that ending the prohibition would increase producer profits by $29.7 billion per year and decrease refiner profits by $22.7 billion per year. While this on balance reflects a net gain to the economy, members of Congress who represent these refiners are likely to take up their cause with this assessment in hand.

And despite the EIA's conclusion about gas prices, opponents of lifting the ban are not likely to abandon the argument that US consumers will suffer if the law is changed. For example, Senator Michael Bennet (D-CO), up for re-election in a difficult race, recently joined some other Senate Democratic colleagues in opening the door to a compromise agreement on crude oil exports that would include measures to support renewable energy. He was immediately attacked by the progressive grassroots organization Allied Progress for being "willing to trade an uncertain energy future of higher gas prices and Middle Eastern oil dependence for a few vaguely defined promises…."

Recognizing the potency of this argument about gas prices, the bill approved by the Senate Energy and Natural Resources Committee in July includes language that allows the President to impose export restrictions for not more than one year in the case of extraordinary circumstances, which would include a finding that the export of crude oil has caused sustained oil shortages or caused oil prices to rise above world market levels for a sustained period. The House bill was amended during committee consideration to add a more general provision making clear that the bill does not limit various authorities the President has to prohibit exports under certain emergency conditions. Any compromise agreement to lift the ban would almost certainly include some sort of Presidential authority to act in the face of higher gas prices.

And it should be noted that objections to lifting the ban are not limited simply to concerns about higher gas prices and the negative impact on domestic refiners. Environmental groups and many Democrats also resist allowing exports because it will encourage more oil and gas production at a time of growing concern over greenhouse gas emissions and climate change.

Conclusion

The House of Representatives is likely to approve the bill to lift the crude oil exports ban in a floor vote in the coming weeks. The focus will then return to the Senate, where a handful of Democrats would need to support the legislation for it to overcome a filibuster and be approved. Democratic Leader Harry Reid (D-NV) and other members such as Senator Bennet and Senator Heidi Heitkamp (D-ND) have indicated that a deal might be possible, but it would need to include support for renewable energy initiatives such as long-term extension of tax incentives. It is uncertain how the White House would react to such a compromise, but the President's spokesman Josh Earnest made clear this week that the Administration does not support the legislation in its current form.

Given those hurdles, a repeal of the ban on crude oil exports may not be politically possible until after the 2016 elections. Nevertheless, the momentum appears to be on the side of the increasing number of lawmakers who question the assumptions underlying a decades-long policy created under very different circumstances.

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